Talks between Bank of Japan and Hong Kong Monetary Authority set to usher in a new era of financial cooperation.

The Bank of Japan: A sign of more comprehensive collaboration with its Hong Kong counterpart.

The Bank of Japan: A sign of more comprehensive collaboration with its Hong Kong counterpart.

In a move said to be a first for any two central banking systems, the Bank of Japan (BOJ) and the Hong Kong Monetary Authority (HKMA) have announced plans for an unprecedented link-up between the financial systems of both jurisdictions. Once in place, this will facilitate the immediate settlement of transactions conducted in either the Hong Kong dollar or the Japanese yen by businesses operating in either location.

Within the remit of the proposed agreement, the BOJ and the HKMA will also have the capacity to process real-time settlements between Japanese government bonds and Hong Kong dollars. This will allow Japanese financial institutions to procure Hong Kong dollars by using Japanese government bonds as collateral via the central bank network. In another plus, the system will also give Hong Kong-based financial institutions a key mechanism for investing surplus funding on a short-term basis.

At present, the majority of the Japanese banks operating in Hong Kong procure local funds by exchanging yen for US dollars and then purchasing Hong Kong dollars with the exchanged currency. Once the proposed new system is operational, Japanese banks will be able to directly procure Hong Kong dollars without the added cost of going via an intermediate currency.

The move comes in the wake of a number of Japanese banks announcing plans to extend their operations on a pan-Asia basis. While this is, in part, an expansionary move, it is also a recognition that the lending opportunities within Japan are still dwindling despite the country's sustained economic growth over the past six years.

With work on the connection of the two banking systems already under way, it is anticipated that the facility will be fully in place by the spring of 2021. Overall, according to a joint statement by the two institutions, once the new arrangement goes live, Japanese banks will be further incentivised to conduct investment-related transaction via Hong Kong, while Hong Kong's reputation as one of the world's leading financial hubs will only be further enhanced.

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